Monday, October 26, 2009

Nouriel Roubini shares some thoughts about gold in this interview with IndexUniverse, drawing the same conclusion that millions of investors have drawn - gold can't go significantly higher without high inflation or Armageddon, neither of which are imminent.

I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

To his personal list of reasons that gold can go up, Nouriel may want to add the one that David Einhorn noted last week - people are increasingly realizing that all paper money is bad.

After what we've seen over the last couple years, $1,200-$1,300 an ounce gold sometime in the next year without either high inflation or a financial catastrophe probably isn't going to shock too many people (aside from those like Roubini).

In fact, if the dollar continues to weaken, that could occur very quickly - just look at the move from $950 to $1,050 over the last couple months and then look at a multi-year chart.

You'll see that the gold price has spent a lot of time in the $800-$1,000 range and is due for another big move up.

Regarding the "lack of inflation" argument, the folks at GATA had a few comments:

If GATA had been part of the interview, we might have asked Roubini to elaborate with a few follow-up questions. For example:

1) What if the monetary inflation already has occurred over decades and has been masked, in regard to gold, by Western central bank gold sales, leasing, and underwriting of bullion bank derivatives, activities meant to mask that inflation and support government currencies and bonds and suppress interest rates?

2) Since it is generally acknowledged that in recent years gold demand has greatly exceeded supply and that the gap has been filled by massive dishoarding of gold by Western central banks, what if, inflation or deflation aside, the day comes when central bank reserves available for dishoarding are simply exhausted? What happens to gold then?

Roubini is a brilliant guy who has identified much that is wrong with the world financial system and who lately has fascinated the financial news media. Imagine the possibilities if someone in his position was to go beyond the financial news media's superficiality in regard to gold, or if the financial news media were to question his own superficiality -- or, for that matter, any other supposed expert's.

The more you think about it, the less meaning there really is in any "gold-inflation" relationship given how central bankers and economists have changed the meaning of the word "inflation" over the years.

We'll probably never have high "consumer price" inflation the way it's currently measured.

As for the GATA arguments about gold price suppression, a few years ago I was starting to worry that I'd never know in my lifetime whether there was anything substantive behind this.

That's much less of a worry these days...

For years, Jim Rogers has poo pooed gold as an under-performing commodity saying that central banks simply have too much of the stuff that they can sell for too long and that this will keep a lid on the price. The sales are ostensibly not because they're suppressing the price, mind you, but because they have no use for the stuff any more.

That seems to have changed rather dramatically in just the last year or so as central banks around the world have been doing more buying than selling.

The gold story is not going to go away anytime soon, though it's not clear whether any economist will ever really understand it.

Scarcity. That Is The Answer To The Question “Why Gold?” End Of Story !

Back to the gold market. There is an estimated 120,000-140,000 tons of gold above ground. That would equate to roughly $4 trillion. The total amount of U.S. dollars in circulation globally is estimated at $8 trillion, and the total size of the global money supply would thereby be closer to $30 trillion. The size of the world stock market is around $40 trillion. At last count, the total size of the global bond market was north of $80 trillion. The total world derivatives market has been estimated at about $800 trillion, face or nominal value. Hopefully all this places the total value of gold above ground into a certain perspective. So, here is what makes gold so attractive, beyond the fact that it is a hedge against irresponsible fiscal, monetary policies and reckless trade policies, is that relative to fiat currency, bonds and equities, it is scarce.